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CMTV > SEC Filings for CMTV > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for COMMUNITY BANCORP /VT



Quarterly Report

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

for the Period Ended September 30, 2013

The following discussion analyzes the consolidated financial condition of Community Bancorp. (the "Company") and its wholly-owned subsidiary, Community National Bank (the "Bank"), as of September 30, 2013, December 31, 2012 and September 30, 2012, and its consolidated results of operations for the two interim periods presented. The Company is considered a "smaller reporting company" under applicable regulations of the Securities and Exchange Commission ("SEC") and is therefore eligible for relief from certain disclosure requirements. In accordance with such provisions, the Company has elected to provide its interim consolidated statements of income, comprehensive income, and cash flows for two, rather than three, years.

The following discussion should be read in conjunction with the Company's audited consolidated financial statements and related notes contained in its 2012 Annual Report on form 10-K filed with the SEC.


This Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements about the results of operations, financial condition and business of the Company and its subsidiary. Words used in the discussion below such as "believes," "expects," "anticipates," "intends," "estimates," "plans," "predicts," or similar expressions, indicate that management of the Company is making forward-looking statements.

Forward-looking statements are not guarantees of future performance. They necessarily involve risks, uncertainties and assumptions. Future results of the Company may differ materially from those expressed in these forward-looking statements. Examples of forward looking statements included in this discussion include, but are not limited to, estimated contingent liability related to assumptions made within the asset/liability management process, management's expectations as to the future interest rate environment and the Company's related liquidity level, credit risk expectations relating to the Company's loan portfolio and its participation in the Federal Home Loan Bank of Boston ("FHLBB") Mortgage Partnership Finance ("MPF") program, and management's general outlook for the future performance of the Company or the local or national economy. Although forward-looking statements are based on management's current expectations and estimates, many of the factors that could influence or determine actual results are unpredictable and not within the Company's control. Readers are cautioned not to place undue reliance on such statements as they speak only as of the date they are made. The Company does not undertake, and disclaims any obligation, to revise or update any forward-looking statements to reflect the occurrence or anticipated occurrence of events or circumstances after the date of this Report, except as required by applicable law. The Company claims the protection of the safe harbor for forward-looking statements provided in the Private Securities Litigation Reform Act of 1995.

Factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, among others, the following possibilities: (1) general economic conditions, either nationally, regionally or locally continue to deteriorate, resulting in a decline in credit quality or a diminished demand for the Company's products and services; (2) competitive pressures increase among financial service providers in the Company's northern New England market area or in the financial services industry generally, including competitive pressures from non-bank financial service providers, from increasing consolidation and integration of financial service providers, and from changes in technology and delivery systems; (3) interest rates change in such a way as to reduce the Company's margins; (4) changes in laws or government rules, including the rules of the federal Consumer Financial Protection Bureau, or the way in which courts or government agencies interpret or implement those laws or rules, increase our costs of doing business causing us to limit or change our product offerings or pricing, or otherwise adversely affect the Company's business; (5) changes in federal or state tax policy; (6) changes in the level of nonperforming assets and charge-offs; (7) changes in estimates of future reserve requirements based upon relevant regulatory and accounting requirements; (8) changes in consumer and business spending, borrowing and savings habits; (9) the effect of changes to the calculation of the Company's regulatory capital ratios under the recently adopted Basel III capital framework which, among other things, will require additional regulatory capital, and change the framework for risk-weighting of certain assets; and (10) the effect of and changes in the United States monetary and fiscal policies, including the interest rate policies of the Federal Reserve Board ("FRB") and its regulation of the money supply; and (11) adverse changes in the credit rating of U.S. government debt.


Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with generally accepted accounting principles in the United States ("US GAAP" or "GAAP") must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company's reasons for utilizing the non-GAAP financial measure. The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP. However, two non-GAAP financial measures commonly used by financial institutions, namely tax-equivalent net interest income and tax-equivalent net interest margin (as presented in the tables in the section labeled Interest Income Versus Interest Expense (Net Interest Income), have not been specifically exempted by the SEC, and may therefore constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether the SEC would regard those measures as subject to Regulation G.

Management believes that these non-GAAP financial measures are useful in evaluating the Company's financial performance and facilitate comparisons with the performance of other financial institutions. However, that information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP.


The Company's consolidated assets on September 30, 2013 were $564,094,499, a decrease of $11,643,746, or 2.02% from December 31, 2012, and an increase of $2,082,544, or 0.37% from September 30, 2012. Loans increased by $15,334,123 from December 31, 2012 and $24,116,632 since September 30, 2012, funded by a combination of a decrease in cash of $16,499,849 since year end, a decrease in available-for-sale securities of $11,556,747 and an increase in deposits of $13,448,012 since September 30, 2012. The Company's goal has been to shift lower-yielding assets to loans in an effort to minimize further margin compression in this prolonged low interest rate cycle. Along with growth in commercial loans, the Company has retained in the loan portfolio some 10 and 15 year fixed rate mortgages to help maintain the relative level of the 1-4 family loans in the overall portfolio. Demand for commercial loans increased in the third quarter of 2013 and remains steady while demand for 1-4 family residential loans has moderated. Deposit balances at September 30, 2013 were $470,549,584, an increase of $13,448,012, or 2.94% from September 30, 2012 and a decrease of $4,947,275, or 1.04% from December 31, 2012. The increase in deposit balances, year-over-year, reflects the combined effect of increases in business and retail checking accounts and savings accounts, partially offset by decreases in time deposits. The increase in business checking accounts is somewhat related to the increase in commercial loans since the Company focuses on building a total relationship with the commercial customer whenever possible. A decrease in a deposit account with the Company's affiliate, Community Financial Services Group (CFSG) in the amount of $4,727,436 from December 31, 2012 to September 30, 2013 and the cyclical fluctuations in the balances of municipal customer accounts contributed to the fluctuations in NOW and money market accounts, with a decrease in government agency accounts (NOW accounts) from December 31, 2012 to September 30, 2013 of $7,517,128, and a decrease in the non-arbitrage deposit accounts (money market accounts) of $6,582,059 from December 31, 2012 to September 30, 2013 and $4,852,373 from September 30, 2012 to September 30, 2013. While an increase is noted in core money market and savings accounts, management believes, to a certain extent that this increase may be related to the $6,850,915 or 5.3% decrease in time deposits year over year as customers shift funds from maturing time deposits to non-maturing deposit accounts due to the low interest rate environment.

Net income for the third quarter of 2013 was $1,354,933 or $0.28 per common share compared to $1,267,351 or $0.26 per common share for the third quarter of 2012. While interest income decreased in the third quarter of 2013 compared to the third quarter of 2012, that decrease was more than offset by a larger decrease in interest expense. The lower interest expense was attributed to a combination of the decrease in interest paid on deposits and a decrease in interest paid on borrowings, including the Company's junior subordinated debentures. The decrease in interest paid on the debentures is due to a scheduled rate adjustment, which resulted in a decrease of $141,823 for the third quarter of 2013 and $421,883 year over year. The decrease in interest paid on deposits is attributable to a decrease in the average rate paid on interest bearing liabilities as customer funds shift out of CDs at higher rates to lower interest-bearing demand and savings accounts. The combined effects of these changes resulted in an increase of $1,096,461 in tax-equivalent net interest income, year over year.

Total non-interest income increased slightly during the third quarter of 2013 compared to the third quarter 2012. One of the components of non-interest income is income generated from selling loans in the secondary market. For several years, the Federal Reserve's efforts to stimulate the real estate market by keeping mortgage interest rates low provided for several refinancing cycles which continued through 2012. The momentum of this cycle has slowed and mortgage business declined during the first nine months of 2013, causing a decrease in fee income from the sale of residential loans in the secondary market. During the third quarter of 2013 mortgage activity resulted in originations of $6,356,815 compared to $12,744,975 for the third quarter of 2012, resulting in points and premiums from the sales of these mortgages of $147,696 compared to $322,637 for the same period last year. These decreases were offset by an improvement in the balance of the impairment of the mortgage servicing rights for the third quarter of 2013 of $102,660 versus a negative adjustment of $44,251 for the third quarter of 2012, resulting in net gains from the sales of mortgages of $396,770 for the third quarter of 2013 compared to $418,594 for the third quarter of 2012. Operating expenses for the quarter decreased by $81,427 when compared to the third quarter of 2012, mostly due to a decrease in amortization of low income housing tax credits associated with the Company's limited partnerships of $177,548, quarter over quarter. Please refer to the Non-interest Income and Expense sections for more information.

On September 25, 2013, the Company's Board of Directors declared a quarterly cash dividend of $0.14 per common share, payable on November 1, 2013 to shareholders of record on October 15, 2013. The Company is focused on increasing the profitability of the balance sheet, improving expense efficiency, and prudently managing risk, particularly credit risk, in order to remain a well-capitalized bank in this challenging economic environment.

National economic data for the third quarter indicates that the economy has continued to expand at a moderate pace, although somewhat more slowly than earlier anticipated. Improvements in the housing sector appear slow, possibly due to the rise in mortgage rates since spring. Most of the housing activity is in the sales of existing homes, while new home sales declined. Although employment has continued to expand at a moderate pace, the national unemployment rate remains elevated. The comments from the latest meeting of the FOMC retracted any movement toward a quantitative easing exit plan due to the fact that the outlook has not improved significantly enough and that tighter financial conditions are a concern. Furthermore, uncertainty about the course of federal fiscal policy over the coming months, including the effects of the recent government shutdown or strains related to the debt ceiling debate, pose downside risks to the economic outlook.

More locally, according to the State of Vermont Department of Labor, the Vermont seasonally adjusted unemployment rate for August was 4.6%. This compares favorably to the annual 2012 rate of 5.0% and is well below the national average of 7.3%. As of the prior month's initial data, Vermont's unemployment rate was tied for the fifth lowest in the country. On a statewide basis job growth has been centered in the trade, transportation, utility and government sectors. Vermont's construction sector is ranked one of the lowest for job growth, and with post-tropical storm Irene projects now complete, forecasts for construction jobs are less than optimistic. Federal spending cuts, i.e. sequestrations, are hampering the New England economy as a whole, but economists say that continued strength in the "Vermont" brand has helped recovery in the manufacturing sector. The Vermont housing market has continued to strengthen, and the tide is beginning to shift from a buyer's market to a more level playing field. The entire state experienced record early summer rain that made it tough on weather-dependent businesses, however early travel and tourism data indicates that the 2013 summer activity is slightly ahead of 2012. In Central Vermont, the Company's growth market, ongoing downtown revitalization and improvement projects are bringing energy and economic growth to the area. Several workforce anchors in the region continue to provide stable operations and employment to the area including Green Mountain Coffee Roasters which employs an estimated 500 employees throughout Washington and Chittenden Counties and which has entered into a minimum five year agreement with Starbucks Coffee Company to manufacture, market, distribute and sell Starbuck's single serve Keurig packs. Technology, financial services and light manufacturing, particularly of specialty artisan foods, continue to be the economic leaders throughout Central Vermont.

A positive addition to Northern Vermont is a multi-phase expansion project of an Orleans County ski area, where construction of three hotels, a hockey arena, an indoor water park and a golf clubhouse has transformed the ski resort and golf course to a year-round indoor and outdoor recreation and wedding destination resort. This project has injected hundreds of millions of dollars of construction funding into the local economy over the last two years utilizing Federal EB5 program capital from foreign investors. A second project upgraded snowmaking and will soon begin construction of new hotels at another local ski resort in Caledonia County. It was recently announced that further investments of EB5 capital are intended to be utilized for several projects in the region including a bio-tech manufacturing and research facility, a water-front hotel and conference center, and a major revitalization project for downtown Newport with construction scheduled to begin in the spring of 2014. Separate from the EB5 projects, it was announced recently that a Vermont developer has committed to bringing a Wal-Mart Super Store to Orleans County. Furthermore, the area recently received status as a foreign trade zone, propelling a major renovation project at the local airport, including an aviation flight school and small plane manufacturing plant in Newport. The projects that are underway have created jobs and boosted economic activity in the area.

The regulatory environment continues to increase operating costs and place extensive burden on personnel resources to comply with a myriad of legal requirements, including those under the Dodd-Frank Act of 2010, the Sarbanes-Oxley Act of 2002, the USA Patriot Act, the Bank Secrecy Act, the Real Estate Settlement Procedures Act and the Truth in Lending Act, and the new Basel III capital framework. It is unlikely that these administrative costs and burdens will moderate in the future.


The Company's significant accounting policies, which are described in Note 1 (Significant Accounting Policies) to the Company's consolidated financial statements in the December 31, 2012 Annual Report on Form 10-K, are fundamental to understanding the Company's results of operations and financial condition because they require management to use estimates and assumptions that may affect the value of the Company's assets or liabilities and financial results. These policies are considered by management to be critical because they require subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. The critical accounting policies govern:

? the allowance for loan losses;
? other real estate owned (OREO);
? valuation of residential mortgage servicing rights (MSRs); ? other than temporary impairment of investment securities; and ? the carrying value of goodwill.

These policies are described further in the Company's December 31, 2012 Annual Report on Form 10-K in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" and in Note 1 (Significant Accounting Policies) to the consolidated financial statements. There have been no material changes in the critical accounting policies described in the 2012 Annual Report on Form 10-K.


The Company's net income for the third quarter of 2013 was $1,354,933, representing an increase of $87,582 or 6.9% over net income of $1,267,351 for the third quarter of 2012. This resulted in earnings per common share of $0.28 and $0.26, respectively. Net income for the first nine months of 2013 increased $381,663 or 11.7% to $3,635,055 compared to $3,253,392 for the same period in 2012. Core earnings (net interest income) for the third quarter of 2013 increased $244,020 or 5.4%, compared to the third quarter of 2012, and the nine months figures show an increase of $1,071,042 or 8.1% for 2013 compared to 2012. Despite continued pressure on the net interest margin and spread in this persistently low interest rate environment, the Company was pleased with these increases. To help offset this pressure, the Company shifted assets from lower yielding taxable investments to loans. Interest income decreased $174,945 or 3.0% for the third quarter of 2013 compared to 2012 and $30,807 or 0.2% for the first nine months of 2013 compared to 2012. Although total deposits increased $13,448,012 or 2.9% year over year, interest expense on deposits, the major component of total interest expense, decreased $198,264 or 22.9% between quarterly periods and $461,276 or 17.5% for the nine month comparison periods, which are both attributable to a decrease in the rates paid on interest-bearing deposit accounts. The rate change on the Company's junior subordinated debentures also had a significant, favorable impact on the Company's interest expense in both the third quarter and nine month comparison periods. The rate paid on these debentures repriced from a fixed rate of 7.56% through December 15, 2012, to a quarterly adjustable floating rate equal to the 3-month London Interbank Offered Rate (LIBOR) plus 2.85%, or 3.130% for the third quarter of 2013. This rate change decreased interest expense by $141,823 or 58.2% for the third quarter of 2013, compared to the third quarter of 2012, and $421,883 or 57.7% year over year. The Company recorded a provision for loan losses of $137,500 for the third quarter of 2013 and $463,750 for the first nine months of 2013 compared to $249,999 for the third quarter of 2012 and $750,001 for the first nine months of 2012, resulting in decreases of $112,499 or 45.0% and $286,251 or 38.2%, respectively. Non-interest income reported modest increases in both periods with $10,208 or 0.7% for the third quarter of 2013 compared to the third quarter of 2012, and $11,249 or 0.3% year over year. Non-interest expense decreased $81,427 or 1.8% for the third quarter in 2013 compared to the same quarter in 2012, with figures of $4,471,596 and $4,553,023, respectively. However, non-interest expense increased $57,980 or 0.4% for the nine month comparison periods with figures of $13,879,148 for 2013 and $13,821,168 for 2012. The section below labeled Non-Interest Income and Non-Interest Expense provides a more detailed discussion on the significant components of these two items.

Return on average assets, which is net income divided by average total assets, measures how effectively a corporation uses its assets to produce earnings. Return on average equity, which is net income divided by average shareholders' equity, measures how effectively a corporation uses its equity capital to produce earnings.

The following table shows these ratios annualized for the comparison periods.

For The Quarters Ended September 30,    2013        2012

Return on Average Assets                  0.96 %      0.90 %
Return on Average Equity                 12.00 %     11.85 %

For The Nine Months Ended September 30,     2013        2012

Return on Average Assets                     0.86 %      0.78 %
Return on Average Equity                    11.00 %     10.35 %

The following table summarizes the earnings performance and certain balance sheet data of the Company for the 2013 and 2012 comparison periods.

                      SELECTED FINANCIAL DATA (Unaudited)

Balance Sheet Data                                                 September 30,            December 31,
                                                                        2013                    2012

Net loans*                                                      $        428,693,593       $  413,734,575
Total assets                                                             564,094,499          575,738,245
Total deposits                                                           470,549,584          475,496,859
Borrowed funds                                                             8,325,000            6,000,000
Total liabilities                                                        518,841,185          532,385,670
Total shareholders' equity                                                45,253,314           43,352,575
*includes loans held-for-sale

Nine Months Ended September 30,                                           2013                   2012

Operating Data
Total interest income                                           $         16,974,033       $   17,004,840
Total interest expense                                                     2,646,626            3,748,475
   Net interest income                                                    14,327,407           13,256,365

Provision for loan losses                                                    463,750              750,001
   Net interest income after provision for loan losses                    13,863,657           12,506,364

Non-interest income                                                        4,429,475            4,418,226
Non-interest expense                                                      13,879,148           13,821,168
   Income before income taxes                                              4,413,984            3,103,422
Applicable income tax expense (benefit)(1)                                   778,929             (149,970 )

   Net Income                                                   $          3,635,055       $    3,253,392

Per Common Share Data

Earnings per common share                                       $               0.74       $         0.65
Dividends declared per common share                             $               0.42       $         0.42
Book value per common shares outstanding                        $               8.81       $         8.42
Weighted average number of common shares outstanding                       4,831,084            4,759,383
Number of common shares outstanding                                        4,854,617            4,796,998

(1) Applicable income tax expense (benefit) includes the income tax effect, assuming a 34% tax rate, on securities (losses) gains which totaled ($5,521) and $140,971, for the nine months ended September 30, 2013 and 2012, respectively.


The largest component of the Company's operating income is net interest income, which is the difference between interest earned on loans and investments versus the interest paid on deposits and other sources of funds (i.e. other borrowings). The Company's level of net interest income can fluctuate over time due to changes in the level and mix of earning assets, and sources of funds (volume) and from changes in the yield earned and costs of funds (rate). A portion of the Company's income from municipal investments is not subject to income taxes. Because the proportion of tax-exempt items in the Company's portfolio varies from year-to-year, to improve comparability of information, the non-taxable income shown in the tables below has been converted to a tax equivalent basis. Because the Company's corporate tax rate is 34%, to equalize tax-free and taxable income in the comparison, we divide the tax-free income by 66%, with the result that every tax-free dollar is equivalent to $1.52 in taxable income.

The Company's tax-exempt interest income is entirely derived from its municipal investments, which comprised the entire held-to-maturity portfolio of $39,218,785 at September 30, 2013, and $50,065,653 at September 30, 2012.

The following table shows the reconciliation between reported net interest income and tax equivalent, net interest income for the nine month comparison periods of 2013 and 2012.

For the Nine Months Ended September 30,       2013             2012

Net interest income as presented          $ 14,327,407     $ 13,256,365
Effect of tax-exempt income                    392,764          367,345
  Net interest income, tax equivalent     $ 14,720,171     $ 13,623,710

The following table presents average earning assets and average interest-bearing liabilities supporting earning assets. Interest income (excluding interest on non-accrual loans) and interest expense are both expressed on a tax equivalent basis, both in dollars and as a rate/yield for the 2013 and 2012 comparison periods.

. . .

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